FHA loans are an excellent opportunity for people with average credit and limited down payment money to own their own home. Year after year, FHA mortgages are some of the most popular financing programs on the market and the 2017 FHA loan limits were raised by Congress so more home buyers will have access in many areas of the country.
The Federal Housing Administration does not extend financing, as home loans are not made by the federal government. Instead, the US government guarantees the loans so that mortgage lenders are encouraged to issue loans to people with lower credit scores and lower income and down payments. Some FHA loans can be obtained with just a 3.5% down-payment.
Each year, Congress, HUD and FHA work together to set new HUD limits for FHA loans. Higher loan amounts could translate to increased purchase power for first time home buyers. A good example of this is the announcement that FHA made regarding loans for 2016, which was made at the end of last year. These government agencies set the FHA 203K loan limits and the max FHA loan amount for the year. According to the press release above, the maximum loan limits for mortgages did increase in 188 counties across the US.
There were not any areas with a decrease in maximum loan limits for home mortgages. We anticipate that 2017 FHA loan limits will be raised in many counties. The 2017 loan limits for Fannie Mae and Freddie Mac increased for the first time in years as it was recently announced. The government sponsored agencies may differ from FHA and HUD loan limits.
Every year, FHA does a recalculation of loan limits that are based on 115% of the area’s median home price. For counties that are located in MSAs or Metropolitan Statistical Areas, the limit for all areas in that MSA is figured based upon the highest cost county.
For 2016, there was no change in the national loan limit ceiling, which is still at $625,000. The floor is at $271,000. The minimum national loan limit floor is set at 65% of the conforming loan limit, which is $417,000. The floor then applies to areas where 115% of the median home value is under 65% of the national loan limit.
Any area of the country where the FHA loan limit is above the floor is considered by HUD and FHA to be a high cost area. The maximum FHA loan limit ceiling for such higher costs areas is 150% of the national US conforming limit.
Watch Video on 2017 FHA Loan Limits and Trump Rethinking Insurance Rate Cut
Where the Limits Come From
One of the most common questions that FHA shoppers ask is where do these HUD loan limits come from. the 2017 FHA loan limits are figured based upon the county in which the home is situated. These parameters set the boundaries for the maximum FHA loan amount allowed by region.
As noted above, the only exception is for homes that are located in MSAs. For these metro areas, limits are determined using the country with the highest median home price within that area.
So, the geographical location has a lot to do with how FHA loan limits are determined. The maximum lending amount for FHA insured loans are based upon a percentage of the loan limits (conforming).
Home shoppers need to understand that limits on FHA loan amounts will vary from county to county. They are based upon the Home Price Index and they are updated or reviewed every year.
Advantages of Higher Maximum FHA Loan Amounts
Below are the most common reasons that home buyers get an FHA or HUD loan:
Low Credit Score Requirements: There are FHA loans available where the borrower can get a loan when they have a credit score of only 580. In some cases with that low of a credit score, it may be possible to put down as little as 3.5%, but more commonly, 10% down is required.
You should keep in mind that FHA sets the minimum credit score at 580, but some lenders may have higher requirements. Generally, you should be able to find an FHA mortgage quite easily if you have a credit score of at least 620.
Low Mortgage Rates: FHA interest rates are usually lower than conventional rates; this is because the loan is guaranteed by the federal government, so the loan provider is willing to lower the rate. If you default, the government will pick up the majority of the tab.
Closing Cost Assistance: FHA loans let the seller to pay as much as 6% of the loan amount to cover closing costs. This is more than the typical 3% that regular loan providers can do.
This is a major benefit for many home buyers; after you have saved money for a down payment, you may not have much money left.
FHA Mortgage Premiums Have Been Reduced: One of the downsides of an FHA loan has been the costs, which comes in the form of upfront and annual mortgage insurance premiums. The upfront insurance premium is 1.75% of the loan amount. This amounts to $3500 on a $200k loan. This will be added to the balance of your loan.
However, in 2015, FHA did reduce the annual mortgage insurance premium from 1.35% to .85%. This is much cheaper and will save you hundreds per year.
The Bottom Line
We are big fans of the FHA loan program because it offers people with average or below average credit scores the ability to buy a home. There are people who have had credit problems who are not financially irresponsible; there are many cases in the last economic downturn where a person lost their job or had hours cut and could not pay their rent or mortgage.
This leads to a lowered credit score, but once the person has a job and is producing income again, he or she could be a very good risk for a home loan. You just need to make sure that the house that you want in your area does not go above FHA loan limits, or you may find that you have to get a conventional loan.